Muthoot Finance April 2017 NCD Public Issue : Details & Review

The interest rates on Bank fixed deposits have been on the downward slope and the interest rates on popular small savings schemes like Senior Citizen Savings Scheme, Post office MIS etc., are not very attractive either. Also, Tax Free Bond Issues are not available now. This is inducing many small investors to look out for better fixed income products which can give decent fixed rate of return.

NCDs or Non Convertible Debentures are one of the fixed income options that can satiate investors’ hunger for better yield.

Almost all the recent and latest NCD Public Issues have been fully subscribed from all category of investors on day one of the subscription period itself.

The most recent NCD issue by  Muthoot Finance (Jan 2017) has been fully subscribed within couple of days from the date of issue opening in January, 2017.

Many companies like Mahindra & Mahindra Fin Services, Edelweiss, Dewan Housing Finance, India Bulls Housing Finance etc., have raised funds by issuing NCDs in FY 2016-17.

Muthoot Finance Ltd’s is now again proposing to offer latest NCD issue . Muthoot Fin is going to offer both secured & un-secured redeemable NCDs. The proposed public issue will be open for subscription from 11th April, 2017 to 10th May, 2017.

What is a Debenture?

Debenture is a type of Debt instrument which offers a fixed rate of interest for a specified tenure. Companies or governments use debentures to borrow money. Debentures are simply loans taken by the companies and do not provide the ownership in the company.

What are NCDs?

Debentures are of two types; Convertible and Non-Convertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate.

An NCD can be Secured or Unsecured. Secured NCDs are backed by the issuer company’s assets to fulfill the debt obligation unlike unsecured NCDs.

Muthoot Finance’s latest NCD issue (Apr 2017) offers non-convertible debentures in the form of both Secured & non-Secured NCDs.

Muthoot Finance April 2017 NCD : Issue Details & Features

Muthoot Finance is the largest Gold Loan non-banking finance company in India. Below are the few important details about Muthoot Finance’s April 2017 NCD Issue;

• NCD Issue opening Date : 11th April, 2017
• Issue Closes on : 10th May, 2017.
• Interest Rate or Coupon Rate on NCDs : The ROI ranges from 8% to 9.06% depending on the category of investor and tenure of the NCDs.
• Issue Size: Base Issue size is Rs 200 cr (with an Option to retain over-subscription amount up to Rs 2,000 Crores, out of which up to Rs 1,950 cr is allocated for Secured NCDs and Rs 50 cr for un-secured NCDs. ))
• Mode of Issue : Demat form
• Face Value or Issue Price of one NCD is Rs 1,000.
• Available Tenor options : 400 days to 96 months.
• Frequency of Interest payment : Monthly, Annual & Cumulative (on maturity date of NCDs).
• Minimum Application size : Rs 10,000 (10 NCDs) and in multiple of Rs 1,000 thereafter.
• Listing : The NCDs are proposed to be listed on BSE stock exchange.
• Security & Asset Cover : The Company and Promoter will create and maintain appropriate security in favour of the Debenture Trustee for the NCD Holders on the assets adequate to ensure required asset cover for the Secured NCDs.
• Credit Ratings : Credit Rating of ‘AA (Stable)’ by ICRA and ‘AA/Stable’ by CRISIL for Secured NCDs for an amount of Rs. 1,950 Crores and Credit Rating of ‘AA (Stable)’ by ICRA and ‘AA/Stable’ by CRISIL for Unsecured NCDs for an amount of Rs. 50 Crores.
• Issue Allocation Ratio : 60% of the issue is for retail & HNI individual investors  (HNIs – individuals (applying for an amount of > Rs 10 lakh).
• There are no PUT & Call options for these NCDs. (What are Put & Call options? – NCDs can have Put or Call options. If a company issues a ‘Callable Debenture’, it means that it can be redeemed by the Issuer (company) before the bond’s maturity. A debenture with a ‘Put option’ works in exactly the opposite manner, wherein the investor can sell the bond to the issuer at a specified price before its maturity.)
• Allotment of NCDs is on ‘first come, first served’ basis.
• NRIs are not eligible to apply to this NCD issue.

Rate of Interest on Muthoot Finance April 2017 NCD

Should you invest in Muthoot Finance NCD Issue (April 2017)?

We all are aware that interest rates on fixed income securities are moving downwards. Also, if you observe the interest rates offered in the last few NCD issues (by Muthoot Fin Jan’17 / Reliance HFL / SREI EFL) were better than the ROI offered in this issue. Considering this downtrend, if you are looking for regular interest income and are in 10% or 20% income tax slab rate, you may consider investing in 2 year / 38 months tenor of Secured NCDs.

If you require regular income, can subscribe to monthly or annual interest payment mode. If you do not require regular income, you may subscribe to cumulative option. However, tt is advisable to avoid investing in un-secured NCDs.

Before investing in NCDs, kindly calculate your post tax returns on debentures and take your decision, as the interest payouts are taxable.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

Are NCDs totally risk-free? – No, they are not risk-free. These carry higher risk than bank deposits. The main risk with NCDs is default risk. The issuer may not be able pay the interest payments.

NCDs are relatively safer assets than Stocks and mutual funds but they are riskier than bank FDs and Government bonds. NCD Issuers normally do not default but when things go drastically wrong, they may face problem in paying the investors.

Kindly keep in mind all the above points when investing in NCDs. Also, do not invest your entire savings or investible surplus in one NCD issue alone.

Have you invested in any of the recent Public Issues of NCDs? Do you prefer NCDs to Bank FDs? Kindly share your views and comments.

(Post first published on : 29-April-2017)